You Federal Reserve said Wednesday it will raise interest rates for the first time in three years as politicians try to cool red-hot inflation, a move that comes at a precarious time for the US economy, which faces a continuing pandemic and war in Europe.
The widely anticipated move – that the Fed would raise rates by 25 basis points – puts an end to the ultra-easy monetary policy put in place two years ago to support the economy during the COVID-19 pandemic.
The take-off of the rate, which puts the federal funds reference rate in a range of 0.25% to 0.5%, is likely only the beginning of a series of increases aimed at curbing uncontrolled inflation.
New economic projections released after the meeting show that policymakers were expecting six more hikes of similar size over the course of 2022 after consumer prices hit a 40-year high. It marks a notable change from just six months ago, when half of central bankers believed interest rate hikes weren’t justified until at least 2023. Fed officials also expect inflation to remain high, closing 2022 at 4.3%, far above the Fed’s annual target of 2.3%.
“With adequate monetary policy tightening, the committee expects inflation to return to its 2% target and for the labor market to remain strong,” the Fed said in its post-meeting statement. It noted that the committee expects “that continued increases in the target range will be appropriate”.
Only one voting member of the Federal Open Market Committee disagreed: St. Louis Fed Chairman James Bullard, who wanted a 50 basis point hike.
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The meeting comes a week after the Department of Labor declared the the consumer price index increased by 7.9% in February compared to the previous year, marking the fastest increase since January 1982, when inflation reached 8.4%. The CPI – which measures a range of goods ranging from gasoline to healthcare – has risen 0.8% since January.
But this week the Fed must walk an economic tightrope as it juggles celestial inflation and the COVID-19 health crisis, including new health restrictions in major Chinese cities and the Russia-Ukraine war. Officials downgraded their forecasts this year, posting much slower economic growth of 2.8%, down from December’s 4% estimate.
Although Fed officials carefully wired their rate hike plans to the public, the Russian invasion of Ukraine, which triggered a massive humanitarian crisis, overturned those plans. Some analysts have warned that as the conflict has exacerbated already skyrocketing inflation, it could force the central bank to take a more nimble approach or risk inducing a recession.
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During his post-meeting press conference, however, President Jerome Powell downplayed the war’s broader economic concerns.
“The likelihood of a recession in the next year is not particularly high,” Powell told reporters, citing the strong job market, solid wage growth, and strong corporate and household balance sheets. “All the signs are that this is a strong economy and that it will be able to thrive in the face of less accommodative monetary policy.”